What is the composition scheme?
The composition scheme is a simplified tax scheme under GST designed for small businesses with an annual turnover of up to Rs. 1.5 crore. It is an optional scheme that allows eligible taxpayers to pay tax at a fixed turnover rate without needing detailed invoicing and maintaining records as required under the regular GST system. The composition scheme aims to reduce the compliance burden for small businesses and allow them to focus on their core activities rather than compliance-related matters. However, businesses opting for the composition scheme cannot avail of input tax credits and need to pay tax at a fixed rate on their total turnover.
Features of Composition Scheme:
The following are the features of the Composition Scheme under GST:
Eligibility:
Small taxpayers having an annual turnover of up to Rs. 1.5 crores can opt for the Composition Scheme.
Tax rate:
Taxpayers under the Composition Scheme must pay lower taxes than regular taxpayers. The tax rate is fixed at a certain percentage of the turnover and varies for different types of businesses.
No Input Tax Credit:
Businesses under the Composition Scheme cannot claim Input Tax Credit (ITC) on the goods and services purchased.
Limited compliance:
Taxpayers under the Composition Scheme must file quarterly returns instead of monthly ones, reducing their compliance burden.
No inter-state transactions:
Businesses under the Composition Scheme cannot make inter-state supplies. They can only supply goods or services within the state.
Limited range of products:
Taxpayers under the Composition Scheme cannot trade in all types of goods or services. They are limited to specific products, which are specified under the scheme.
Restriction on issuing tax invoices:
Businesses under the Composition Scheme cannot issue tax invoices to their customers. Instead, they have to issue a bill of supply.
Eligibility criteria for the Composition Scheme:
Not all taxpayers are eligible to opt for the composition scheme under GST. The following are the eligibility criteria for the composition scheme:
- Only taxpayers registered under the regular scheme can opt for the composition scheme.
- The aggregate turnover in the preceding financial year should be at most Rs. 1.5 crores. The threshold for North Eastern and hilly states is Rs. 75 lakhs.
- Service providers are not eligible for the composition scheme. Only manufacturers, traders, and restaurants (not serving alcohol) are eligible.
- Taxpayers who supply goods through e-commerce operators are not eligible for the composition scheme.
- Taxpayers who purchase goods from an unregistered supplier cannot opt for the composition scheme.
- Taxpayers who supply goods through an inter-state transaction or an e-commerce operator are not eligible for the composition scheme.
It should be noted that once a taxpayer has opted for the composition scheme, they cannot avail of an input tax credit on their purchases and are also not allowed to collect tax from their customers. Additionally, they are required to pay taxes at a fixed turnover rate. Therefore, taxpayers should carefully evaluate the benefits and limitations of the composition scheme before opting for it.
How do I sign up for the Composition Scheme?
You can apply for the Composition Scheme through the GST portal. Here are the steps to follow:
- Log in to the GST portal using your credentials.
- Go to the “Services” tab and select “Registration” from the drop-down menu.
- Click on “Application for Composition Levy” under “Registration Forms.”
- Fill in the required details, including your GSTIN and PAN.
- Provide the necessary documents, such as a bank statement, proof of business address, and a photograph.
- Apply, and the GST authorities will process it.
- Once the application is approved, you will receive a notification, and your GSTIN will be updated to reflect your enrollment in the Composition Scheme.
It’s important to note that the Composition Scheme is optional and subject to specific eligibility criteria. Therefore, before applying for the scheme, you should check whether your business meets the necessary conditions.
Documents required in Composition Scheme
The documents required for registration under the Composition Scheme are as follows:
- PAN card of the business
- Aadhaar card of the authorized signatory or proprietor/partners/directors
- Bank account details of the business
- Proof of business registration such as GST registration certificate or any other business registration document
- Photograph of the authorized signatory or proprietor/partners/directors
- Address proof of the place of business, such as rent agreement, electricity bill, property tax receipt, etc.
In addition, the taxpayer may be required to furnish other documents per the tax authorities’ specific requirements. It is advisable to consult with a tax professional to ensure all the necessary documents are in place before applying for registration under the Composition Scheme.
Disqualification and Penalty of Composition Scheme
Under the GST composition scheme, certain conditions must be met, and if any of these conditions are not met, the taxpayer may be disqualified from the scheme. Some of the reasons for disqualification from the composition scheme are:
- The taxpayer’s annual turnover exceeds the prescribed limit.
- The taxpayer is not registered under GST.
- The taxpayer engages in interstate outward supplies.
- The taxpayer is involved in making supplies through e-commerce operators.
- The taxpayer supplies goods or services that are exempt from GST.
- The taxpayer purchases goods from an unregistered supplier.
- The taxpayer needs to maintain proper records of their transactions.
If a taxpayer is disqualified from the composition scheme, they must file regular GST returns and pay taxes accordingly. In addition to disqualification, penalties may also be imposed on taxpayers who violate the rules of the composition scheme. The penalty may be a percentage of the tax that should have been paid or a specific amount determined by the tax authorities. It is always advisable to comply with the conditions of the composition scheme to avoid any disqualification or penalty.